Refinance Example

Mr. Smith bought a home in January of 2001.  He took out a mortgage of $100,000 at that time for a term of 30 years and at a rate of 7.5%.  His principle and interest portion of the mortgage payment is $699.21 per month.  Today Mr. Smith has a balance on that mortgage of $97,998.58 with 28 years left of payments.  If he was willing to refinance, he could either take out a new 30 year mortgage or a new 15 year mortgage.  In the example, June 25, 2003 rates are used.  All closing costs would be included in the new mortgage so there would be no out of pocket costs to him.  The comparison of the two options vs. his current mortgage are as follows:

Current                        New 30 Year                  New 15 Year Rate                                        7.50%                              5.50%                           4.875% Monthly Payment (P&I)          $699.21                            $573.47                          $792.14                                            x 336 mos.                       x 360 mos.                     x 180 mos. Total Payments                    $234,934.56                     $206,449.20                   $142,585.20 Savings of Refinance                $0.00                            $28,485.36                    $92,349.36

This example shows the power of what refinancing can do.  If you could increase your payment by a small amount or sometimes not at all, the reduction of interest payments could be tremendous.  A 15 year mortgage would take years off your mortgage and build your equity in the home much faster.  If you would rather lower your payment, a new 30 year mortgage may be your best option.  Both options can save you money even if your current situation is not similar to the one above.

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